Dive Brief:

• Canadian lender TD has embarked on a comprehensive strategic review, assessing its opportunities, priorities, productivity and efficiency initiatives, as well as capital allocation alternatives, bank executives said Thursday. “Everything is on the table,” said Raymond Chun, TD’s current chief operating officer who will take the CEO reins in April.
• In light of that, TD has shelved medium-term financial targets related to adjusted earnings per share growth, return on equity and operating leverage, the second-largest Canadian bank said in reporting fourth-quarter and fiscal year 2024 earnings results Thursday. TD expects to update those targets in the second half of next year. 
• TD’s fourth-quarter net income for its U.S. retail segment declined 32%, to C$863 million ($614 million), as the bank undertakes a balance sheet restructuring to reduce its U.S. assets by about 10% to comply with a $434 billion asset cap imposed in October.

Dive Insight:

The Toronto-based bank, which entered a plea agreement with the Justice Department and was fined $3.09 billion in October stemming from deficiencies with the bank’s money laundering safeguards, issued a cautionary statement in its earnings release Thursday that pointed to the long road ahead for the bank. 

“For fiscal 2025, it will be challenging for the Bank to generate earnings growth as it navigates a transition year, advances AML remediation with investments in its risk and control infrastructure, and continues to invest in its businesses,” the release said.

Addressing the bank’s anti-money laundering issues will be a multi-year endeavor, CEO Bharat Masrani said during Thursday’s conference call to discuss results. The DOJ said criminals used the bank to move money connected to the illicit drug fentanyl, and TD failed to adequately monitor trillions of dollars in transactions for several years.

As it allocated more money to address AML shortcomings, the embattled bank’s fiscal year 2024 expenses soared 19% year-over-year, to C$35.5 billion ($25.3 billion), according to its earnings presentation. And the bank projects expenses to grow 5% to 7% for FY2025, due to higher spending on its risk and control infrastructure and employees. 

The bank’s FY2024 revenue rose 13%, to C$57.2 billion ($40.8 billion), but net income fell 17%, to C$8.8 billion ($6.3 billion). 

The strategic review, started in November, is “broad and detailed,” as executives assess which strategies will best position TD to compete moving forward and where the bank may need to divest or invest, Chun said Thursday. He expects it will take about five months to get through the review.

To trim its U.S. assets to accommodate the regulatory cap, TD intends to sell or reduce some lending activities, including export/import lending and commercial auto dealer lending, according to the earnings presentation. The bank is also planning to sell up to $50 billion in investment securities. Total U.S. assets amounted to $431 billion as of the end of October. Asset reduction is expected to be complete by the end of FY2025.

While balance sheet restructuring activities and AML remediation work will affect the U.S. retail segment, “we remain committed to the U.S. market and confident in the strength of our franchise,” Chun said. 

TD expects most AML management remediation actions to occur in the calendar year 2025, with some slated for 2026. Sustainability and testing activities are planned for 2026 and 2027, and the suspicious activity report lookback is expected to be completed in 2027, TD said. 

With remediation work underway, the lender has bolstered its financial crime staff and appointed a Bank Secrecy Act officer. TD has also moved to strengthen governance and oversight by forming dedicated committees to oversee remediation, has set new risk limits and is enhancing its transaction monitoring platform. 

The bank also noted it’s applying learnings from the U.S. AML/BSA experience to make improvements to its enterprise AML program globally. “It is critical that we do so, and we will,” even though the bank hasn’t identified the same deficiencies outside the U.S., Masrani said during the call.

TD also noted plea agreements meant one TD entity was “disqualified” from serving as an investment adviser or underwriter in the U.S., meaning the bank had to seek a waiver from the Securities and Exchange Commission “and implement interim arrangements” until that’s obtained, according to the news release.

On Wednesday, the Financial Transactions and Reports Analysis Centre of Canada said it signed an agreement with the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., enabling the Canadian regulator to share supervisory information on Canadian banks that do business in the U.S. The information-sharing agreement focuses on AML and anti-terrorist financing compliance, FinTRAC said in a post on social media site X. 

Although conversations among regulators on the matter predated TD’s regulatory reckoning, the need for such a framework became clearer amid TD’s issues, The Globe and Mail reported Wednesday, citing an unnamed source.